This Thing Could Put A Rocket Under BP plc Shares

bpOil giant BP (LSE: BP) (NYSE: BP.US) was forced into a massive restructuring of its business as a result of the Gulf of Mexico oil spill in 2010. The FTSE 100 company has sold billions of dollars of assets to raise cash to fund its liabilities, as well as to invest in its continuing operations.

In one respect there was something of a silver lining to the disaster, in that it gave BP a certain headstart. The company had to focus on areas of the most profitable growth rather than simply increasing volumes — a route its rivals have now come to see as the way forward.

Rising cash flow = rising dividends

The ultimate financial cost to BP of the Gulf of Mexico oil spill won’t be known for some years, but the more compensation water passes under the bridge — $43bn to date — the more the market is focusing on the attractions of the new slimmed-down company.

Organic capital expenditure is running at $25bn a year and is expected to continue at around this level until the end of the decade. Management is expecting operating cash flow of about $30bn this year (up 50% on 2011), and further growth in the years ahead to support a rising dividend.

Further divestments = further share buybacks

BP is not only looking to reward shareholders with rising dividends, but also with share buybacks.

An $8bn buyback programme announced in March 2013 is nearing its conclusion, and has helped the shares rise from 450p to 500p today. Management said in October last year that it intends to divest a further $10bn of assets by the end of 2015, and to employ the proceeds “with a bias to share buybacks”.

Now, the current $8bn buyback programme is set to complete by 29 July (next Tuesday), which also happens to be the date of BP’s half-year results announcement. I think a good cash-flow performance and news on a new buyback programme could help drive BP’s shares higher again in the coming months. In April, the company said it had already agreed $3bn of the targeted further $10bn of asset divestments, so there’s certainly scope for positive news.

Low P/E and high yield

BP is currently trading on a forward P/E of not much more than 10, compared with the FTSE 100 long-term average of 14. If the company continues its recovery, investors could be looking at an additional boost to their capital from a re-rating of the shares up towards that average over the medium term.

On top of that, BP currently offers a pretty juicy 4.7% forecast income for this year, and with decent prospects of strong dividend growth to come.

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G A Chester has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.